● shows where cash came from (receipts) and exactly how cash was spent (obligations). ● reports why cash increased or decreased through the period. The statement of cash flows explains why the net gain as reported on the income statement does not equal the change in the cash balance. In essence, the cash flow declaration is the communicating link between the accrual-based income declaration and the cash reported on the balance sheet.
1. Predict future cash moves. Previous cash payments and receipts help forecast future cash moves. 2. Evaluate management decisions. Wise investment decisions help the business prosper, while unwise decisions cause the business to have problems. Investors and creditors use cash flow information to evaluate managers’ decisions. 3. Forecast ability to pay money and dividends. Lenders want to know whether they will gather on their loans.
Stockholders want dividends on their investments. The declaration of cash flows makes these predictions. On the declaration of cash flows, Cash means cash readily available and cash in the bank or investment company, and cash equivalents, that are highly liquid investments that may be converted into profit three months or less. As the name suggests, cash equivalents are so close to cash that they are treated as “equals.” Types of cash equivalents are money-market accounts and investments in U.S.
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